This study investigates the relationship between education funding and policy support and the academic achievement disparity between migrant and local students in China, utilizing data from the China Education Panel Survey (CEPS) and employing a hierarchical linear model (HLM). Focusing on within-school comparisons to control for school segregation, the analysis reveals persistent disparities despite higher per-student funding for migrant children. First, under fiscal decentralization, local governments have higher discretion in allocating education funding, yet failing to translate resource increments into migrant students’ academic gains. Second, systemic discrimination in local high school admission policies disproportionately affects migrant students. Restrictive policies are significantly associate with decrease in math and English scores of migrant students compared to local students. Lastly, Math and English performance, reliant on structured instruction, show stronger sensitivity to policy barriers, while Chinese scores, influenced by familial cultural capital, exhibit smaller gaps. The study highlights how China’s hukou system and fiscal decentralization jointly perpetuate educational inequity, demonstrating that financial inputs alone cannot counteract institutional exclusion. These findings offer empirical insights into educational inequality in internal migration contexts, contributing to global discourse on addressing racial and background inequality in education.